On Board

 Nearly all men can stand adversity, but if you want to test a man’s character, give him power.

McLeod Governance has as its mission statement – well at least what it wrote on Day One of setting up the website and it needed something to fill the front page! – that it would mostly focus on internal auditing, risk management and corporate governance but that there would be times when interest takes us down paths less busy yet not less interesting.

Well today we combined one of the key themes of McLeod Governance – corporate governance – with one of the less travelled paths that we like to amble down.

Our journey today takes us through the smokey corridors of the history of the concept of a Board of Directors.

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Let’s start at the top – the role of the Chairman.

It is often said Chairman has its origins in 10th century Kingdom of England when the king or his spokesman sat alone in a chair before the group, who sat on benches.

Anyone that has ever been to a Board meeting will realise that not much has changed in 1,100 years!

The history of Boards is somewhat less clear – other than to say that it was an incremental development.

Until the end of the nineteenth century, it seems to have been generally assumed that the general meeting (of all shareholders) was the supreme organ of the company, and the board of directors was merely an agent of the company subject to the control of the shareholders in general meeting.

A 1906 English Court of Appeal (the second most senior court of the English court system) changed all that.

In the case of Automatic Self-Cleansing Filter Syndicate Co v Cunningham [1906] 2 Ch 34 (Side bar note from McLeod Governance: why do the great precedent cases always involve companies with such wonderful names) it was held that the division of powers between the board and the shareholders in general meeting depended upon the construction of the Articles of Association and that, where the powers of management were vested in the board, the general meeting could not interfere with their lawful exercise.

The Articles were held to constitute a contract by which the members had agreed that “the directors and the directors alone shall manage.”

The new approach did not secure immediate approval, but it was endorsed by the House of Lords in Quin & Artens v Salmon [1909] AC 442 and has since received general acceptance.

Under English law – and by extension most Western world corporate systems – unless the directors are acting contrary to the law or the provisions of the Articles, the powers of conducting the management and affairs of the company are vested in them.

The modern doctrine was expressed in Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113 by Greer LJ as follows:

A company is an entity distinct alike from its shareholders and its directors. Some of its powers may, according to its articles, be exercised by directors, certain other powers may be reserved for the shareholders in general meeting.

If powers of management are vested in the directors, they and they alone can exercise these powers.

The only way in which the general body of shareholders can control the exercise of powers by the articles in the directors is by altering the articles, or, if opportunity arises under the articles, by refusing to re-elect the directors of whose actions they disapprove.

They cannot themselves usurp the powers which by the articles are vested in the directors any more than the directors can usurp the powers vested by the articles in the general body of shareholders.

This takes McLeod Governance to the point where we start wondering about the future.

Can we envisage a time when the near century old precedents that are the foundation of the Board’s authority be dismanted and if so how?

For the perpetual record of those that will be reading McLeod Governance in 100 years time – we are a confident bunch here at McLeod Governance that we will be still around and / or our writings are immortal – we predict that the role of the Board of Directors will change fundamentally … and within our lifetime.

There is a tide of e-democracy that is slowly sweeping over forward thinking Governments.

Once that wave hits the shores of our Parliaments it will be only a matter of time before it washes over our corporate structures as well.

How will it manifest itself – we don’t know.

But we can see the swell rising in the distance.

Hold on for an amazing ride.

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